Launching your own business is exciting but also offers a multitude of challenges. A few thoughts on how best to tackle the financial aspects of the journey.
It is a exciting time when you finally decide it is times to go on your own and start your own business, however it can also be daunting. The safety of a (somewhat) guaranteed income month on month gives way to the prospect of months without any income and the additional costs involved with setting up a business.
In order to navigate this journey I have put together a few ideas make it slightly easier - to reduce the costs or to make the profits more valuable (read lower taxes!).
1. Take a tax efficient salary. One of the benefits of running your own business is that you decide whether you take your income as dividend or salary. Getting this right can mean a higher take home and, therefore, more money to invest in your business.
2. Pension v salary. This is complicated but can be very beneficial if you get it right. It depends how much pension you already have (think LTA), as well as how much money you need today versus your retirement plan, but having the flexibility to decide how much can be contributed to a pension can provide a very valuable tax advantage.
3. Claiming expenses through the company. The HMRC states that expenses incurred wholly for work are tax deductible. This can mean that if you are now working out of a home office then any journey made (for example, to a client or employee) are allowable and can be charged to the company. Subsistence is also allowable but you need to be careful. Claiming your lunch expenses if you were visiting clients works as does going to a temporary place of work. The logic is archaic based on a 1930 ruling when companies gave free or heavily subsidised lunches at the office. It’s bound to change but while it remains you should use it .
4. Allocating part of your personal costs to the business where there's shared use. An obvious example is your home if you're using a spare room as an office.
5. Share option schemes for employees such as EMI schemes. Taking on employees can be daunting because you can end up suddenly incurring large fixed costs without a guarantee that revenue will be generated off the back of it . It’s also far harder as a start-up to pay the salary that a large company can pay. To incentive employees to join at relative low salaries offering share options is a good idea. This is very tax efficient for the employee. If structured correctly, the increase (hopeful) in value of the shares over time can be treated as capital and tax only at 10% on sale which, depending on the size of profit, could reduce in up to a 35% saving. It’s also tax deductible for the company. Various conditions apply to get this benefit so you need to ensure you have the right advise.
6. Doing accurate monthly forecasts of profitability. Most banks require this for any loans but even, if no high capital outlay is required upfront, it’s critical to have a plan of where you are going.
7. Have an exit strategy. It may seem a crazy idea when starting out, but knowing how to leave at a point in time reduces stress and ensures mistakes aren’t made that could impact your ability to exit efficiently. Whether your plan is to pass the business on to your children or exit in three years through a public listing, planning ahead is critical.
8. Employ a good accountant. The savings inevitably pay the fees and it frees up valuable energy for you to focus on building your business.